No. 94-1340
In the Supreme Court of the United States
OCTOBER TERM, 1994
CITIZENS BANK OF MARYLAND, PETITIONER
v.
DAVID STRUMPF
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONER
DREW S. DAYS, III
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
LAWRENCE G. WALLACE
Deputy Solicitor General
KENT L. JONES
Assistant to the Solicitor General
GARY D. GRAY
Attorney
Department of Justice
Washington, D.C. 20530
(202)514-2217
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QUESTION PRESENTED
Whether the creditor of a debtor in bankruptcy
may withhold payment of a debt it owes to the debtor
while the creditor seeks relief from the automatic
stay to exercise its setoff rights.
(I)
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TABLE OF CONTENTS
Page
Interest of the United States . . . . 1
Statutory provisions involved . . . . 2
Statement . . . . 2
Summary of argument . . . . 4
Argument:
The refusal of a creditor to pay a debt owed to the
bankruptcy estate is not a "setoff" that violates the
automatic stay of Section 362 (a) (7) of the Bank-
ruptcy Code . . . . 5
Conclusion . . . . 22
Appendix . . . . 1a
TABLE OF AUTHORITIES
Cases:
Archer, In re, 34 B.R. 28 (Bankr. N.D. Tex. 1983) . . . . 16
Aspen Industries, Inc. v. Marine Midland Bank,
426 N.Y.S.2d 620 (App. Div. 1980), rev'd, 439
N.Y.S.2d 316 (1981) . . . . 16
Baker v. National City Bank of Cleveland, 511 F.2d
1016 (6th Cir. 1975) . . . . 16
Baltimore & Associates, Inc. v. Municipal Escrow
& Title Co., 625 F. Supp. 1271 (D.D.C. 1985) . . . . 16
Bank of Marin v. England, 385 U.S. 99 (1966) . . . . 6, 20, 21
Barnhill v. Johnson, 112 S. Ct. 1386 (1992) . . . . 20
Barrier v. Marine Midland Trust Co., 284 A.2d 418
(Md. 1971) . . . . 17
Beecham v. United States, 114 S. Ct. 1669 (1994 ) . . . . 12
Charter Co., In re, 913 F.2d 1575 (llth Cir. 1990) . . . . 8
Chicago Board of Trade v. Johnson, 264 U.S. 1
(1924) . . . . 17-18
Citizens & Peoples National Bank of Pensacola v.
United States, 570 F.2d 1279 (5th Cir. 1978) . . . . 16
(III)
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IV
Cases-Continued:
Page
Corland Corp., In re, 967 F.2d 1069 (5th Cir.
1992) . . . . 10, 13, 21
Cumberland Glass Manufacturing Co. v. DeWitt &
Co., 237 U.S. 447 (1915) . . . . 18
Davis, In re, 889 F.2d 658 (5th Cir. 1989), cert.
denied, 495 U.S. 933 (1990) . . . . 21-22
Department of Revenue of Oregon v. ACF Indus-
tries, Inc., 114 S. Ct. 843 (1994) . . . . 12
Dewsnup v. Timm, 502 U.S. 410 (1992) . . . . 10
Edgins, In re, 36 B.R. 480 (Bankr. 9th Cir. 1984) . . . . 9
Farmers Markets, Inc., In re, 792 F.2d 1400 (9th
Cir. 1986) . . . . 18
Ferguson Enterprises, Inc. v. Main Supply, Inc.,
868 S.W.2d 98 (Ct. App. 1993), review denied,
No. 92-CA-0884-MR (Ky. Feb. 16, 1994) . . . . 16
Hill v. Mercantile First National Bank of
Doniphan, 693 S.W.2d 285 (Me. Ct. App. 1985) . . . . 16
Horton Dairy, Inc. v. United States, 986 F.2d 286
(8th Cir. 1993) . . . . 16
Johnson v. Home State Bank, 501 U.S. 78 (1991 ) . . . . 10
Kamen v. Kemper Financial Services, Inc., 500
U.S. 90 (1991) . . . . 17
Lough, In re, 163 B.R. 586 (Bankr. D. Idaho
1994) . . . . 9
Michigan Carpenters' Council Pension Fund v.
Smith & Andrews Construction Co., 681 F. Supp.
1252 (E.D. Mich. 1988) . . . . 16
Mountain States Telephone & Telegraph Co. v.
Pueblo of Santa. Ana, 472 U.S. 237 (1985) . . . . 12
Normand Josef Enterprises, Inc. v. Connecticut
National Bank, 646 A.2d 1289 (Corm. 1994) . . . . 16
Northern Pipeline Construction Co. v. Marathon
Pipe Line Co., 458 U.S. 50 (1982) . . . . 8
Patterson, In re, 967 F.2d 505 (llth Cir. 1992) . . . . 10, 19, 20
Pittsburgh National Bank v. United States, 657
F.2d 36 (3d Cir. 1981) . . . . 14, 15
Rake v. Wade, 113 S. Ct. 2187 (1993) . . . . 13
Rash, In re, 31 F.3d 325 (5th Cir. 1994) . . . . 10
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V
Cases-Continued:
Page
Rozel Industries, Inc., In re, 120 B.R. 944 (Bankr.
N.D. Ill. 1990) . . . . 14
Saugus General Hospital Inc., In re, 698 F.2d 42
(1st Cir. 1983) . . . . 16
Simmons, In re, 765 F.2d 547 (5th Cir. 1985) . . . . 10
Small Business Administration v. Rinehart, 887
F.2d 165 (8th Cir. 1989) . . . . 2
Studley v. Boylston National Bank, 229 U.S. 523
(1913) . . . . 17
United Savings Ass'n of Texas v. Timbers of
Inwood Forest Associates, Ltd., 484 U.S. 365
(1988) . . . . 12
United Seeds, Inc. v. Eagle Green Corp., 389
N.W.2d 571 (Neb. 1986) . . . . 16
United States v. Bell Credit Union, 860 F.2d 365
(l0th Cir. 1988) . . . . 16
United States v. Central Bank of Denver, 843 F.2d
1300 (l0th Cir. 1988) . . . . 16
United States v. Citizens & Southern National
Bank, 538 F.2d 1101 (5th Cir. 1976), cert.
denied, 430 U.S. 945 (1977) . . . . 16
United States v. Inslaw, Inc., 932 F.2d 1467 (D.C.
Cir. 1991), cert. denied, 502 U.S. 1048 (1992) . . . . 7, 8, 12,
21, 22
United States v. Kimbell Foods, Inc., 440 U.S. 715
(1979) . . . . 17
United States v. Little Lake Misere Land Co., 412
U.S. 580 (1973) . . . . 17
United States v. Nordic Village, Inc., 503 U.S. 30
(1992) . . . . 21
United States v. Norton, 717 F.2d 767 (3d Cir.
1983) . . . . 2, 14, 15
United States v. Reynolds, 764 F.2d 1004 (4th Cir.
1985) . . . . 2, 14, 15
United States v. Ron Pair Enterprises, Inc., 489
U.S. 235 (1989) . . . . 13
United States v. Whiting Pools, Inc., 462 U.S. 198
(1983) . . . . 9
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VI
Statutes:
Page
Bankruptcy Code (11 U.S.C.):
11 U.S.C. 106 (a) . . . . 13
11 U.S.C. 362 . . . . 2, 21
11 U.S.C. 362(a) (1)-(8) . . . . 6
11 U.S.C. 362(a) (3) . . . . 7, 19, 21
11 U.S.C. 362(a) (6) . . . . 22
11 U.S.C. 362(a) (7) . . . . 3 ,4 ,5 ,10 ,11 ,12 ,17 ,18 ,19 ,20
11 U.S.C. 362(d) . . . . 13
11 U.S.C. 362(h) . . . . 11, 13
11 U.S.C. 363(a) . . . . 9
11 U.S.C. 363(e) . . . . 9
11 U.S.C. 502(d) . . . . 21
11 U.S.C. 506(a) . . . . 9, 10, 13
11 U.S.C. 506(b) . . . . 13
11 U.S.C. 542 . . . . 7, 8, 20, 21
11 U.S.C. 542(b) . . . . passim
11 U.S.C. 553 . . . . 4, 5, 8, 9, 21
11 U.S.C. 553 (a) . . . . 6, 8, 9, 10
Bankruptcy Reform Act of 1994, Pub. L. No.
103-394, 113, 108 Stat. 4117 . . . . 13
26 U.S.C. 6402(a) . . . . 17, 21
31 U.S.C. 3716(a) . . . . 17
31 U.S.C. 3728 . . . . 17
Miscellaneous:
2 Collier on Bankruptcy (15th ed. 1995) . . . . 9
Paul S. Groschadl, "Freezing" the Debtor's Bank
Account: A Violation of the Automatic Stay?,
57 Am. Bankr. L.J. 75 (1983) . . . . 16
H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977) . . . . 10
S. Rep. No. 989, 95th Cong., 2d Sess. (1978) . . . . 10
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In the Supreme Court of the United States
OCTOBER TERM, 1994
No. 94-1340
CITIZENS BANK OF MARYLAND, PETITIONER
v.
DAVID STRUMPF
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONER
INTEREST OF THE UNITED STATES
This case concerns whether, during the period that
the creditor in a bankruptcy case is seeking relief
from the automatic stay to exercise its setoff rights,
the creditor may withhold payment of a debt owed
to the debtor. This issue is of substantial importance
to the United States, whose agencies and instrumen-
talities are often creditors under federal programs
involving loans, loan guarantees, contracts, assistance
and benefit payments and tax collection activities.
Indeed, two of the decisions upon which the court of
appeals relied in the present case involved holdings
that the United States violated the automatic stay by
withholding a refund of overpaid taxes for one tax
(1)
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2
year even though the debtor had a larger outstanding
tax liability for a different year. Pet. App. 9, 10,
citing United States v. Reynolds, 764 F.2d 1004 (4th
Cir. 1985); United States v. Norton, 717 F.2d 767
(3d Cir. 1983). A third decision relied on by the
court of appeals involved efforts of the Small Busi-
ness Administration to offset its loan claim against
crop payments due the debtor from the Department
of Agriculture. Pet. App. 7, citing Small Business
Administration v. Rinehart, 887 F.2d 165 (8th Cir.
1989).
The lower courts have reached a variety of con-
flicting results in addressing this recurring issue.
As a result, federal agencies face disparate treat-
ment of identical claims arising under national pro-
grams. The United States therefore has a substan-
tial interest in the resolution of this recurring
conflict.
STATUTORY PROVISIONS INVOLVED
The relevant provisions of the Bankruptcy Code
are reprinted in the appendix to this brief.
STATEMENT
1. Petitioner is a bank conducting business in the
State of Maryland. In 1989, petitioner loaned re-
spondent approximately $5000. That loan was in de-
fault before respondent filed a petition for relief in
bankruptcy under Chapter 13 in January 1991 (Pet.
App. 3). Under Section 362 of the Bankruptcy Code,
the filing of the petition in bankruptcy gave rise to
an "automatic stay" of various types of activity by
respondent's creditors, In particular, the filing
stayed "the setoff of any debt owing to the debtor
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3
that arose before the commencement of the [bank-
ruptcy] case. " 11 U.S.C. 362(a) (7).
In October 1991, the bank moved for relief from
the automatic stay in order to set off approximately
$3200 then in respondent's checking account against
the remaining balance that respondent owed on the
loan. While the motion for relief from the stay was
pending, the bank placed an "administrative hold"
on the balance of approximately $3500 in respon-
dent's checking account. During the period of the
hold, petitioner temporarily refused to pay with-
drawals that respondent sought to make from the
account. Respondent reacted to the bank's "admin-
istrative hold" by filing a motion in bankruptcy court
seeking to have the bank held in contempt of the
automatic stay (Pet. App. 4).
The bankruptcy court ruled on debtor's contempt
motion before addressing the bank's prior motion for
relief from the automatic stay. The court concluded
that the bank's "administrative hold" on respondent's
account represented a "setoff" in violation of the
automatic stay and, as a sanction for violation of the
stay, ordered the bank to pay actual and punitive
damages and attorneys' fees to respondent (Pet. App.
34-36). At that time, the court reserved its ruling
on the bank's motion for relief from the stay.
Nineteen days later, the bankruptcy court granted
the bank's motion for relief from the stay and au-
thorized the bank to set off respondent's remaining
account balance against the unpaid loan. By that
time, however, there was nothing left to set off be-
cause respondent had withdrawn all of his funds
from the bank (Pet. App. 4-5).
2. The district court reversed the judgment hold-
ing the bank in violation of the automatic stay. The
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4
court concluded that the bank's temporary freeze of
respondent's account during the period that the bank
sought relief from the automatic stay was not a vio-
lation of the statute (Pet. App. 18-33).
3. The court of appeals reversed and reinstated
the bankruptcy court judgment (Pet. App. 1-17).
The court held that a creditor's administrative
freeze of amounts subject to setoff is "tantamount"
(id. at 9) to the exercise of the right of setoff and
therefore violates 11 U.S.C. 362 (a) (7). The court
reasoned that its holding was compelled by "the
clear and unambiguous language" of the statute,
which prohibits any "setoff" during the automatic
stay (Pet. App. 13-14). The court further stated
that the bank's actions in freezing a debtor's accounts
could substantially diminish the debtor's chances for
successful rehabilitation (id. at 14-15). Concluding
that the automatic stay had been violated by the
bank, the court ordered reinstatement of the award
of actual and punitive damages and attorneys' fees
to respondent (id. at 15-16).
SUMMARY OF ARGUMENT
Section 553 of the Bankruptcy Code recognizes
the defense of setoff in bankruptcy cases and Sec-
tion 542 (b) of the Code provides that a creditor is
not required to "pay" a claim of the estate to the
extent that such a claim "may be offset" (11 U.S.C.
542 (b)). A creditor, such as petitioner, is not acting
in violation of the automatic stay by temporarily
declining to pay the debtor funds that the Bank-
ruptcy Code expressly provides need not be paid at
all.
The automatic stay of a "setoff" under Section
362 (a) (7) of the Bankruptcy Code does not apply
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5
to the creditor's temporary maintenance of the status
quo while application is made to the court for a
judicial determination whether a "setoff" may prop-
erly be made. The term "setoff" in the stay provision
of Section 362(a) (7) was necessarily employed by
Congress in a manner conformable with ordinary
usage -to mean the formal exercise of a right of
setoff through an overt act that purports to extin-
guish, pro tanto, the opposing claim. The completed
"setoff" to which Section 362(a) (7) refers neces-
sarily involves far more than the creditor's tempo-
rary refusal to pay a claim and the creditor's sub-
mission of that claim for adjudication under the pro-
cedures specifically provided for this purpose by Sec-
tions 362 (d) and 542(b) of the Bankruptcy Code.
ARGUMENT
THE REFUSAL OF A CREDITOR TO PAY A DEBT
OWED TO THE BANKRUPTCY ESTATE IS NOT A
"SETOFF" THAT VIOLATES THE AUTOMATIC STAY
OF SECTION 362(a)(7) OF THE BANKRUPTCY CODE
Section 362 (a) (7) of the Bankruptcy Code pro-
vides an automatic stay of "the setoff" of any prepe-
tition debt of the debtor by any creditor. 11 U.S.C.
362 (a) (7). The court of appeals erred in this case
in concluding that a "setoff" occurs when a creditor
maintains the status quo by not paying a claim of
the debtor in order to assert a defense to that claim.
Sections 542 (b) and 553 of the Bankruptcy Code
expressly protect a creditor from the obligation to pay
amounts owed to the debtor to the extent that the
creditor possesses a right of setoff. A creditor, such
as petitioner, is not acting in violation of the auto-
matic stay by temporarily declining to pay the debtor
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6
funds that the Bankruptcy Code expressly provides
need not be paid.
1. a. As this Court stated in Bank of Marin v.
England, 385 U.S. 99 (1966), the relationship of a
bank and its depositor "is that of debtor and credi-
tor" and is "founded upon contract" (id. at 101).
A bankruptcy estate that seeks to enforce such a
contractual relationship "is subject to all claims and
defenses which might have been asserted against the
bankrupt but for the filing of the petition." Ibid.
One of the defenses that a bank or other creditor
may assert to a claim of the bankruptcy estate is
the defense of setoff. 11 U.S.C. 553(a).
It is not a violation of the automatic stay for an
entity to refuse to pay a disputed debt that the bank-
ruptcy estate asserts is owed to it. 1. Neither the Bank-
ruptcy Code in general nor the automatic stay provi-
sions in particular require entities against whom the
bankruptcy estate asserts a claim simply to succumb
to the estate's claims. The automatic stay bars vari-
ous affirmative actions by the creditors of the estate
___________________(footnotes)
1 The automatic stay lists several types of actions that, upon
the filing of the bankruptcy case, creditors are restrained
from taking. The stay restrains "all entities" from (i) com-
mencing or continuing judicial or administrative proceedings
against the debtor, (ii) enforcing judgments against the
debtor, (iii) obtaining possession of, or exercising control
over, property of the debtor's estate, (iv) taking action to
create or enforce a lien in property of the debtor's estate, (v)
taking action to create or enforce a lien in the debtor's prop-
erty to secure a claim that arose before the bankruptcy case
was commenced, (vi) taking action to collect a claim against
the debtor, (vii) setting off any debt owing to the debtor that
arose before the commencement of the case against any
claim of the debtor and (viii) commencing or continuing a
proceeding concerning the debtor in the United States Tax
Court. 11 U.S.C. 362 (a) (1)-(8).
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7
(see note 1, supra), but it does not require entities
against whom the estate has asserted a claim to
waive all defenses that they may have to the claim
and immediately pay it. As the court of appeals
stated in United States v. Inslaw, Inc., 932 F.2d
1467, 1473 (D.C. Cir. 1991), cert. denied, 502 U.S.
1048 (1992), 2.
[t]he object of the automatic stay provision is
* * * to make sure that creditors do not destroy
the bankrupt estate in their scramble for relief.
* * * Fulfillment of that purpose cannot require
that every party who acts in resistance to the
debtor's view of its rights violates [the auto-
matic stay].
The refusal of petitioner to pay the debt claimed
by the bankruptcy estate in this case, and its decision
to seek an adjudication of its claimed defense of
"setoff," do not violate the automatic stay.
When, as occurred in this case, the bankruptcy
estate believes that an entity has improperly refused
to pay a debt owed to the estate, the estate is to apply
to the bankruptcy court for a "turnover" order under
Section 542 of the Bankruptcy Code. Under Section
542, when "an entity that owes a debt that is prop-
erty of the estate and that is matured, payable on
demand, or payable on order" has refused to pay
that debt to the estate, the bankruptcy court may
___________________(footnotes)
2 In Inslaw, the court rejected the assertion of the bank-
ruptcy estate that a failure of an entity to agree with the
debtor's assertion of its rights in particular property repre-
sents an "exercise [of] control over property of the estate"
(11 U.S.C. 362 (a) (3)) within the meaning of the automatic
stay provision. See 932 F.2d at 1473.
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8
order that entity (11 U.S.C. 542(b) (emphasis
added ))
[to] pay such debt to, or on the order of, the
trustee, except to the extent that such debt may
be offset under section 553 of this title against
a claim against the debtor.
The "turnover" provision thus expressly incorporates
defense of setoff under Section 553. Section
553, in turn, provides that every creditor has the
right "to offset a mutual debt owing by such cred-
itor to the debtor that arose before the commence-
ment of the [bankruptcy] case * * * against a claim
of such creditor against the debtor that arose before
the commencement of the case." 11 U.S.C. 553(a).
Under these provisions, when petitioner declined
to pay the debt claimed by the estate-a debt repre-
sented by the bank account balance-the estate's
remedy was to apply for a "turnover" order under
Section 542. 3. In such "turnover" proceedings, peti-
___________________(footnotes)
3 If the claim that the bankruptcy estate asserts is disputed
as to either its validity or its amount, adjudication of that
claim would not fall within the core jurisdiction of the bank-
ruptcy court. See, e.g., United States v. Inslaw, Inc., 932 F.2d
at 1472 ("the debtor cannot use the turnover provisions to
liquidate contract disputes or otherwise demand assets whose
title is in dispute"); In re Charter Co., 913 F.2d 1575, 1579
(11th Cir. 1990). As the court stated in Inslaw, "Congress
may not vest in a non-Article III (bankruptcy) court the
power to adjudicate a traditional contract action where the
defendant is before the court 'only because the plaintiff has
previously filed a petition for reorganization in that court.'"
932 F.2d at 1472, quoting Northern Pipeline Construction
Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982) (Rehn-
quist, J., concurring in the judgment). In this case, the claim
of the bankruptcy estate was not disputed and the claim of
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9
tioner would have been entitled to assert its defense
of setoff under Section 553 and the bankruptcy
court would have been required to recognize that
defense under Section 542 (b).
b. The Bankruptcy Code recognizes two specific
restrictions on the statutory right of setoff under
Section 553: (i) the creditor may be required in a
"turnover" proceeding, notwithstanding its right of
setoff, to pay the amount of the debt claimed by the
estate if the estate provides "adequate protection"
for the creditor's setoff right through some other
means (11 U.S.C. 553(a), incorporating 11 U.S.C.
363(e)) ; 4. and (ii) the creditor may not, indepen-
___________________(footnotes)
setoff was recognized to be valid by the bankruptcy court
(Pet. App. 4). In this context, the "turnover" order procedure
of Section 542 (b) would have been applicable and should have
resulted in an order that petitioner "turn over" only the por-
tion of the account, if any, that exceeded the amount of the
creditor's setoff rights against the estate.
4 The bankruptcy estate may demand payment of a matured
debt that is subject to a creditor's right of setoff in order to
"use" the proceeds of the debt to operate the business.
In re Edgins, 36 B.R. 480, 483 (Bankr. 9th Cir. 1984).
Since the proceeds of that debt are security for the credi-
tor's claim (11 U.S.C. 506(a)) and are considered "cash
collateral" (11 U.S.C. 363(a)), the creditor may demand
"adequate protection" of its interest as a condition of pay-
ment (11 U.S.C. 363(e)). See 2 Collier on Bankruptcy
Par. 363.02, at 363-16 (15th ed. 1995). See also United States
v. Whiting Pools, Inc,, 462 U.S. 198, 202-204 (1983). The
creditor may be forced to pay the debt and forgo its setoff
rights only if the trustee or debtor can furnish an alternative
"adequate Protection" for the setoff right. 11 U.S.C. 363(e).
If the estate cannot provide adequate protection for the set-
off right, the court cannot force payment to the estate. See
ibid.; In re Lough, 163 B.R. 586, 588 (Bankr. D. Idaho 1994).
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10
dently of these Bankruptcy Code procedures, set off
its claim against the debtor's claim without obtaining
an order from the court lifting the automatic stay
against such a "setoff" (11 U.S.C. 553(a), incor-
porating 11 U.S.C. 362(a) (7)). Subject only to
those two restrictions, the creditor's right of setoff
is fully preserved in bankruptcy. In re Corland
Corp., 967 F.2d 1069, 1076 (5th Cir. 1992) ; In re
Patterson, 967 F.2d 505, 508 ( llth Cir. 1992); H.R.
Rep. No. 595, 95th Cong., 1st Sess. 377 (1977) ;
S. Rep. No. 989, 95th Cong., 2d Sess. 91 (1978).
In particular, Section 542(b) specifies that a cred-
itor who owes a debt to the debtor is not required to
"pay" that debt to the extent that the creditor's claim
may be set off against it. 11 U.S.C. 542 (b). 5. A
creditor such as petitioner cannot logically be said to
be acting in contempt of the automatic stay when it
temporarily declines to pay the debtor funds that Sec-
t ion 542(b) of the Bankruptcy Code expressly pro-
vides need not be paid at all.
2. The court of appeals nonetheless concluded that
even a temporary refusal to pay the estate's claim
___________________(footnotes)
5 Section 506(a) of the Code provides further protection for
the right of setoff by specifying that a creditor's claim of
"setoff" against the debtor "is a secured claim." 11 U.S.C.
506 (a). As a "secured claim," the right of setoff is not subject
to discharge merely to enhance the debtor's opportunity for
rehabilitation. See Dewsnup v. Timm, 502 U.S. 410, 418
(1992); Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).
"[W]hile reorganization of the debtor is an important policy
goal, this goal cannot be pursued by exterminating a secured
creditor's property interest. 'Reorganization is not a Holy
Grail to be pursued at any length.'" In re Rash, 31 F.3d 325,
330 (5th Cir. 1994). See also In re Simmons, 765 F.2d 547
(5th Cir. 1985).
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11
is "tantamount" to a "setoff" and is therefore barred
by the automatic stay of Section 362(a) (7) (Pet.
App. 9, 13-14). That conclusion would deprive the
provisions of the Code that protect the creditor's
defense of "setoff" of all plausible meaning.
Under the reasoning applied by the court of ap-
peals in this case, an entity that owes a debt to the
estate may not protect its right of setoff by simply
refusing to pay the estate's claim and submitting its
rights to adjudication in an orderly fashion. Instead,
under the threat of statutory sanctions (11 U.S.C.
362 (h)), the creditor must immediately pay funds
demanded by the debtor and thereby relinquish its
right of setoff (Pet. App. 7) ("the debtor may defeat
the creditor's right of setoff by removing all funds in
the creditor's possession before the creditor can ob-
tain relief from the stay"). The facts of this case
reveal that this concern is not merely theoretical:
between (i) the time that the bankruptcy court
entered its order finding the bank in contempt for
refusing to pay the withdrawals requested by the
estate and (ii) the court's subsequent order finding
the bank to be entitled to set off its claim against
that account, the debtor withdrew the entire account
balance (Pet. App. 4-5).
The court's conclusion that the creditor must bow
to the debtor's demand for payment eviscerates the
provisions of the Code that purport to protect the
defense of "setoff" and that specify that a creditor
is not required to "pay" a claim subject to setoff.
11 U.S.C. 542 (b). The decision of the court of ap-
peals in this case thus fails to honor this Court's
admonition that the meaning of a statute should be
discerned from a reading "of the whole statute, not
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12
of isolated sentences. " Beecham v. United States,
114 S, Ct. 1669, 1671 (1994) ; see United Savings
Ass'n of Texas v. Timbers of Inwood Forest Asso-
ciates, Ltd., 484 U.S. 365, 371 (1988) (interpreta-
tion of Bankruptcy Code "is a holistic endeavor").
In particular, the court of appeals erred by disre-
garding the "elementary canon of construction that
a statute should be interpreted so as not to render
one part inoperative. " Department of Revenue of
Oregon v. ACF Industries, Inc., 114 S. Ct. 843, 848
(1994), quoting Mountain States Telephone & Tele-
graph Co. v. Pueblo of Santa Ana, 472 U.S. 237,
249 (1985).
The decision of the court of appeals would convert
the provisions of the automatic stay from a shield-
that protects the estate against certain affirmative
acts of the creditors of the estate-into a sword-
that requires other parties to pay claims of the es-
tate without delay and without opportunity for ad-
judication of the defenses they may have to the
estate's claim. It is ironic that, under the court's
reasoning, (i) an entity that possesses a right of
setoff (a right explicitly recognized in the Bank-
ruptcy Code itself) may be found to violate the auto-
matic stay by refusing immediately to pay a claim
of the bankruptcy estate but (ii) an entity that re-
fuses to pay a claim of the estate based upon any
other defense to that claim could not be found to
have violated the stay. See United States v. Inslaw,
inc., 932 F.2d at 1473.
The automatic stay of a "setoff" under Section
362(a) (7) of the Bankruptcy Code is not designed
to defeat the ultimate right of setoff. Instead, its
purpose is to ensure a provisional state of equilib-
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13
rium. It stays formal implementation of a setoff
pending an "orderly examination of the debtor's and
creditor's rights. " In re Corland Corp., 967 F.2d at
1076. A creditor may initiate such an "orderly ex-
amination" by asking the court for relief from the
stay. See 11 U.S.C. 362 (d ). 6. The bankruptcy estate
also may initiate an examination of the creditor's
setoff rights by applying for an order requiring the
"turnover" of the disputed funds under Section
542(b).
If it is determined in such proceedings that the
creditor has a valid right of setoff, the creditor is not
required to pay the debt to the estate to the extent of
the setoff. 11 U.S.C. 542(b). Only to the extent
that the creditor's debt to the debtor exceeds the
creditor's setoff rights against the debtor is the cred-
itor required to "pay such debt to, or on the order of,
the trustee" (ibid. ). 7.
___________________(footnotes)
6 A creditor who violates the stay by settling off the mutual
debts without first obtaining relief from the stay may be
liable for damages and attorneys' fees to any individual in-
jured by the violation. 11 U.S.C. 362 (h). Under recent
amendments to the Bankruptcy Code, the United States may
also be liable for damages for a violation of the automatic
stay. 11 U.S.C. 106 (a), as amended by the Bankruptcy Re-
form Act of 1994, Pub. L. No. 103-394, 113, 108 Stat. 4117.
7 When the creditor's claim may be offset against a larger
debt to the debtor, the claim is oversecured. See 11 U.S.C.
506 (a). In calculating the creditor's claim, the creditor is
entitled to add post-petition "interest on such claim, and any
reasonable fees, costs, or charges provided for under the
agreement under which such claim arose." 11 U.S.C. 506 (b);
see Rake v. Wade, 113 S. Ct. 2187, 2191-2192 (1993); United
States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989).
The entire amount of the principal, interest, fees and other
---------------------------------------- Page Break ----------------------------------------
14
3. In concluding that a creditor violates the auto-
matic stay against a "setoff" by temporarily declin-
ing the debtor's request for payment, the court of
appeals gave little heed to these carefully designed,
interlocking statutory provisions. Instead, the court
relied (Pet. App. 9-10 ) on its earlier decision in
United States v. Reynolds, 764 F.2d 1004 (4th Cir.
1985), which in turn had relied on the reasoning of
the Third Circuit in United States v. Norton, 717 F.2d
767 (1983). In Norton, which involved the govern-
ment's temporary refusal to pay a refund of a tax
overpayment for one year when a larger federal
tax deficiency existed for a different year, the Third
Circuit noted that the Bankruptcy Code neither de-
fines the term "setoff" nor explains when a "setoff"
occurs for purposes of the automatic stay. 71.7 F.2d
at 772. The court concluded that nonbankruptcy law
should govern and looked to Pennsylvania law-
rather than to federal internal revenue law-to de-
termine when a "setoff" of federal tax liabilities
occurs. Ibid. Purporting to apply Pennsylvania law,
the court stated in Norton that "retention of a
debtor's funds by a creditor provides sufficient evi-
dence of an intent to setoff" the mutual debts, Ibid.,
citing Pittsburgh National Bank v. United States,
657 F.2d 36 (3d Cir. 1981). 8. Invoking the analysis
___________________(footnotes)
charges may then be set off against the claim of the estate.
In re Rozel Industries, Inc., 120 B.R. 944, 953 (Bankr. N.D.
Ill. 1990) .
8 Pennsylvania applies a rule of "automatic setoff," under
which a setoff is said to occur as a matter of law at the
moment that the creditor's claim matures. See Pittsburgh
National Bank v. United States, 657 F.2d 36, 38 (3d Cir.
1981). Even if Pennsylvania law were the appropriate law
---------------------------------------- Page Break ----------------------------------------
15
of Norton in Reynolds, the Fourth Circuit stated
that it could not find any state or federal law as
to when a "setoff" occurs with respect to tax over-
payments. The court nonetheless elected to apply
what it regarded as the "broader rationale" of Nor-
ton (764 F.2d at 1007, quoting 717 F.2d at 773) :
If a bank could freeze the debtor's accounts upon
the filing of a petition in bankruptcy, the debt-
or's chances for successful rehabilitation would
be substantially diminished.
There are two significant defects in the reasoning
applied by the Fourth Circuit in Reynolds and in the
present case.
(i) If, as the court assumes, the term "setoff" in
the Bankruptcy Code is to be defined by resort to
non-Code law, the general rule is that a setoff re-
quires (i) a decision to effectuate a setoff, (ii) an
___________________(footnotes)
governing the setoff of federal tax overpayments in bank-
ruptcy (which we dispute), the Third Circuit's rationale in
Norton would be incorrect. Under the "automatic setoff"
doctrine of Pennsylvania, it is the maturation of a debt that,
by operation of law, causes the debt "automatically" to be
set off. See 657 F.2d at 38. If that reasoning were applied to
a case involving taxes, a setoff could be said to occur "auto-
matically" the instant that a tax overpayment was received.
If the overpayment were received before bankruptcy, the
setoff would be a fait accompli before the automatic stay ever
arose and there would have been no stay violation. If, on the
other hand, the overpayment were received after the bank-
ruptcy petition was filed, the automatic stay would intervene
to prevent the setoff from occurring "automatically" under
state law. The state automatic setoff would be stayed by the
federal automatic stay. No violation of the stay against set-
offs could occur, at least not by operation of Pennsylvania's
automatic setoff doctrine, upon which the Third Circuit pur-
ported to rely in Norton.
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16
overt act accomplishing the setoff and (iii) a record
of the setoff. See, e.g., Horton Dairy, Inc. v. United
States, 986 F.2d 286, 291 (8th Cir. 1993) ; United
States v. Bell Credit Union, 860 F.2d 365, 369 (l0th
Cir. 1988) ; United States v. Central Bank of Denver,
843 F.2d 1300, 1309-1310 (10th Cir. 1988) ; In re
Saugus General Hospital, Inc., 698 F.2d 42, 47 (1st
Cir. 1983) ; Citizens & Peoples National Bank of
Pensacola v. United States, 570 F.2d 1279, 1283-1284
(5th Cir. 1978) ; United States v. Citizens & Southern
National Bank, 538 F.2d 1101, 1107 (5th Cir. 1976),
cert. denied, 430 U.S. 945 (1977); Baker v. Na-
tional City Bank of Cleveland, 511 F.2d 1016, 1018
(6th Cir. 1975); Michigan Carpenters' Council Pen-
sion Fund v. Smith & Andrews Construction Co., 681
F. Supp. 1252, 1254 (E.D. Mich. 1988) ; Baltimore
& Associates, Inc. v. Municipal Escrow & Title Co.,
625 F. Supp. 1271, 1272-1273 (D.D.C. 1985) ; In re
Archer, 34 B.R. 28, 29 (Bankr. N.D. Tex. 1983) ;
Normand Josef Enterprises, Inc. v. Connecticut Na-
tional Bank, 646 A.2d 1289, 1299 (Corm. 1994);
Ferguson Enterprises, Inc. v. Main Supply, Inc., 868
S.W.2d 98, 100 (Ct. App. 1993), review denied, No.
92-CA-0884-MR ( Ky. Feb. 16, 1994) ; United Seeds,
Inc. v. Eagle Green Corp., 389 N.W.2d 571, 574
(Neb. 1986) ; Hill v. Mercantile First National Bank
of Doniphan, 693 S.W.2d 285, 291-292 ( Mo. Ct. App.
1985) ; Aspen Industries, Inc. v. Marine Midland
Bank, 426 N.Y.S.2d 620, 622 (App. Div. 1980), rev'd
on other grounds, 439 N.Y.S.2d 316 (1981). But see
note 8, supra. See also Paul S. Groschadl, "Freezing"
the Debtor's Bank Account: A Violation of the Auto-
matic Stay?, 57 Am. Bankr. L.J. 75, 76 (1983). That
general rule- rather than the exceptional Pennsyl-
vania rule relied on in Norton-appears applicable in
Maryland, where the dispute in the present case
---------------------------------------- Page Break ----------------------------------------
17
arose. See Barrier v. Marine Midland Trust Co., 284
A.2d 418,424 (Md. 1971). 9.
(ii) More fundamentally, the court's suggestion
that nonbankruptcy law should determine whether
a "setoff" has occurred for purposes of Section 362
(a) (7) of the Bankruptcy Code cannot be reconciled
with the other applicable provisions of that Code. 10.
___________________(footnotes)
9 Federal statutes governing the government's setoff rights
similarly contemplate the taking of affirmative steps to exe-
cute a setoff. See 26 U.S.C. 6402(a) ("In the case of any
overpayment, the Secretary * * * may credit the amount of
such overpayment * * * against any liability in respect of an
internal revenue tax on the part of the person who made the
overpayment and shall * * * refund any balance to such per-
son."); 31 U.S.C. 3716 (a) ("The head of the agency may col-
lect by administrative offset."); 31 U.S.C. 3728 ("The Comp-
troller General shall withhold paying that part of a judgment
against the United States Government presented to the Comp-
troller General that is equal to a debt the plaintiff owes the
Government [and] * * * shall * * * discharge the debt if the
plaintiff agrees to the setoff * * * or * * * have a civil action
brought [to establish the Government's claim] .").
10 Although a creditor's right of setoff is conferred by non-
bankruptcy law, bankruptcy law governs the manner of its
enforcement in bankruptcy cases. See Studley v, Boylston
National Bank, 229 U.S. 523, 528 (1913). In fashioning a rule
concerning how a setoff is to be executed in bankruptcy cases,
courts should avoid state and other nonbankruptcy law that
"would frustrate specific objectives of the federal programs"
(Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 98
(1991), quoting United States v. Kimbell Foods, Inc., 440 U.S.
715, 728 (1979) ). See United States v. Little Lake Misere
Land Co., 412 U.S. 580, 596 (1973), When the language of the
bankruptcy statute indicates that a uniform federal rule is
intended to govern enforcement of rights that arise under
nonbankruptcy substantive law, this Court has not hesitated
to adopt a uniform federal rule. See Chicago Board of Trade
---------------------------------------- Page Break ----------------------------------------
18
Under Section 542 (b), a creditor in bankruptcy is
not required to "pay" a claim to which the defense
of setoff applies. 11 U.S.C. 542(b). Congress
could not have intended the temporary refusal to
pay such a claim- and the application for a judicial
determination of whether a "setoff" may be made-
to itself represent a "setoff" in violation of the auto-
matic stay. Instead, the term "setoff" in the stay
provision of Section 362(a) (7) was necessarily em-
ployed by Congress in a manner conformable with
ordinary usage-to mean the formal exercise of a
right of setoff through an overt act that purports to
extinguish, pro tanto, the opposing claim. 11. The com-
pleted "setoff" to which Section 362(a) (7) refers
necessarily involves far more than the temporary re-
fusal to pay a claim.
The construction of the term "setoff" adopted by
the court of appeals in this case-that a creditor's
___________________(footnotes)
v. Johnson, 264 U.S. 1, 10 (1924) (a federal definition of
the term "property" is appropriate "when the language of
Congress indicates a policy requiring a broader construction
of the [term] than the state decisions would give it").
11 As this Court stated in an analogous context under the
bankruptcy practice that preceded enactment of the Bank-
ruptcy Code, a "setoff" in a bankruptcy case "is [not] auto-
matically made between parties holding mutual credits" and
"is not self -executing" ( Cumberland Glass Manufacturing Co.
v. DeWitt & Co., 237 U.S. 447, 457 (1915) ). The administra-
tive freeze at issue in this case is nothing more than a refusal
to pay communicated to the bank's various branches and auto-
mated teller machines. The fact that the freeze must be com-
municated internally and effected on an institution-wide basis
does not make the bank's refusal to pay any more objection-
able under the automatic stay. It is not the purpose of the
automatic stay to frustrate nonbankruptcy setoff rights by
preventing internal creditor communications. See In re Farm-
ers Markets, Inc., 792 F.2d 1400, 1404 (9th Cir. 1986).
---------------------------------------- Page Break ----------------------------------------
19
refusal to honor a debtor's demand for payment is
"tantamount to the exercise of a right of setoff"
(Pet. App. 9 )-would directly nullify the complex
statutory framework that protects and preserves the
right of setoff. In particular, it would nullify the
express statement in Section 542(b) that the credi-
tor may refuse to "pay" a debt that is subject to
setoff. By failing to recognize that the Bankruptcy
Code protects the ultimate implementation of the
creditor's right of setoff, the court of appeals erred
in holding that a temporary refusal to pay is barred
by Section 362(a) (7).
4. a. A creditor's temporary refusal to pay the
claim of the debtor's estate also would not violate
other aspects of the automatic stay. In In re Patter-
son., 967 F.2d at 511, the court of appeals concluded
that a temporary "freeze" on the debtors' account
with a credit union would violate Section 362(a) (3)
of the Bankruptcy Code. That Section stays "any act
* * * to exercise control over property of the estate."
11 U.S.C. 362(a) (3). 12. The court reasoned that a
___________________(footnotes)
12 In Patterson, the court of appeals found it unneces-
sary to determine whether the refusal of a bank to pay an
account claimed by the debtor would represent an exercise of
a "setoff" in violation of Section 362(a) (7). The court stated
that, even if "we assume that a freeze is not a setoff" (967
F.2d at 509), the credit union's freeze on the debtors' account
represented an "exercise [of] control over property of the
estate" within the scope of the automatic stay under Section
362 (a) (3). 967 F.2d at 511-512.
The court further stated, however, that, "[a]lthough we
do not address here the issue of whether a freeze constitutes
a setoff, per se, our opinion eviscerates the logic of those
opinions which answer this question in the negative." 967
F.2d at 513. In making this assertion, the court was referring
to the portion of its opinion that stated, without citation
---------------------------------------- Page Break ----------------------------------------
20
"freeze" of the debtors' account by the credit union
represented an "exercise [of ] control over property
of the estate" because "[t]he funds in the [debtors']
accounts became property of the estate when the
[debtors] filed for bankruptcy." 967 F.2d at 511.
The analysis of the court of appeals in Patterson
is fundamentally flawed. As this Court has noted
on several occasions, a bank does not hold a discrete
set of funds that belong to the depositor; instead,
the bank owes its depositor a contract debt. Barnhill
v. Johnson, 112 S. Ct. 1386, 1389 (1992) ; Bank of
Marin v. England, 385 U.S. at 101. When the de-
positor files for bankruptcy relief, it is his contract
claim against the bank-not any specified fund or set
of dollar bills-that becomes property of the estate.
___________________(footnotes)
of authority, that a creditor entitled to a setoff should protect
its rights not by freezing the debtor's account but by filing
"an ex parte motion" for relief from the stay and "ac-
company this motion with the funds from the debtor's ac-
count to be paid into the registry of the bankruptcy court."
Id. at 511. In recommending that course of action, the
court of appeals gave no consideration to the common mean-
ing of the term "setoff" that Congress employed in Section
362 (a) (7) (see pages 15-16, supra) or to the fact that the
"turnover" procedures of Section 542 contemplate that the
debtor, as well as the creditor, may place the matter at issue
in the bankruptcy court (see pages 7-9, supra). There is
little doubt that a creditor could follow the procedure recom-
mended by the court in Patterson, and it also may be that
a bankruptcy court could order temporary payment of the
disputed account into the court's registry in a particular case.
But there is nothing to indicate that Congress intended to
require those procedures to be followed at the risk of contempt
upon default. No other account debtor of the estate would be
subject to contempt for refusal to pay a disputed claim of
the estate.
---------------------------------------- Page Break ----------------------------------------
21
Bank of Marin v. England, 385 U.S. at 101. 13. A re-
fusal to pay sums that the estate claims are owed to
it on a contract debt is not an exercise of control over
"property of the estate." It is, instead, the assertion
of a defense to the debtor's claim-a defense that
Sections 553 and 542 (b) specifically authorize. The
bankruptcy estate steps into the shoes of the debtor
and therefore necessarily has taken its claim to the
account "subject" to that defense (Bank of Marin v.
England, 385 U.S. at 101).
As the court of appeals explained in United States
v. Inslaw, Inc., 932 F.2d at 1473, it is not a viola-
tion of the automatic stay of Section 362 (a) (3)
"whenever someone already in possession of property
* * * refuses to capitulate to a bankrupt's assertion
of rights in that property." A creditor who is en-
titled to protect its right of setoff under Sections 542
and 553 of the Bankruptcy Code need not abandon
that right to avoid a violation of the automatic stay
under Section 362. In re Corland Corp., 967 F.2d
at 1077. 14.
___________________(footnotes)
13 Similarly, when a debtor has made an "overpayment" of
federal taxes for which a refund is available under the In-
ternal Revenue Code, the debtor is not entitled to any specific
set of funds located in the Treasury. United States v. Nordic
Village, Inc., 503 U.S. 30, 38-39 (1992). The "property" of the
debtor in that situation is his statutory cause of action for a
refund. That statutory cause of action is itself, however,
subject to a statutory right of setoff. See 26 U.S.C. 6402 (a).
If the bankruptcy estate were to bring a "turnover" action
to collect the refund in bankruptcy court, the United States
would not be required to pay the refund to the extent that
it possesses a right of setoff. 11 U.S.C. 542 (b).
14 Cf. In re Davis, 889 F.2d 658 (5th Cir. 1989) (court is
not to sanction creditor under Section 502(d) of the Bank-
ruptcy Code for refusing to pay debt to estate pending resolu-
---------------------------------------- Page Break ----------------------------------------
22
b. A temporary refusal to pay a debt owed to the
bankruptcy estate also does not violate the automatic
stay of Section 362(a) (6), which proscribes "any
act to collect [a prepetition debt]." 11 U.S.C. 362
(a) (6). Temporarily preserving the status quo
pending a determination of the creditor's setoff right
by the bankruptcy court does not represent an un-
authorized "act to collect"; if it did, the provisions
of Section 542(b) that specify that a debt subject
to setoff need not be paid would be nullified. See 11
U.S.C. 542(b). "For obvious reasons, * * * courts
have recognized that 362(a) cannot stay actions
specifically authorized elsewhere in the bankruptcy
code" (United States v. Inslaw, Inc., 932 F.2d at
1474).
CONCLUSION
The judgment of the court of appeals should be
reversed.
Respectfully submitted.
DREW S. DAYS, III
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
LAWRENCE G. WALLACE
Deputy Solicitor General
KENT L. JONES
Assistant to the Solicitor General
GARY D. GRAY
Attorney
May 1995
___________________(footnotes)
tion of creditor's right to setoff), cert. denied, 495 U.S. 933
(1990).
---------------------------------------- Page Break ----------------------------------------
APPENDIX
1. 11 U.S.C. 362 (1988) provides in relevant
part:
(a) Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or
303 of this title, or an application filed under section
5(a) (3) of the Securities Investor Protection Act of
1970 (15 U.S.C. 78eee(a) (3)), operates as a stay,
applicable to all entities, of-
* * * * *
(7) the setoff of any debt owing to the debtor
that arose before the commencement of the case
under this title against any claim against the
debtor; * * *
* * * * *
(d) On request of a party in interest and after
notice and a hearing, the court shall grant relief
from the stay provided under subsection (a) of this
section, such as by terminating, annulling, modifying,
or conditioning such stay-
(1) for cause, including the lack of adequate
protection of an interest in property of such
party in interest; or
(2) with respect to a stay of an act against
property under subsection (a) of this section,
if-
(A) the debtor does not have an equity
in such property; and
(B) such property is not necessary to an
effective reorganization.
* * * * *
(1a)
---------------------------------------- Page Break ----------------------------------------
2a
(h) An individual injured by any willful violation
of a stay provided by this section shall recover actual
damages, including costs and attorneys' fees, and,
in appropriate circumstances, may recover punitive
damages.
2. 11 U.S.C. 363 (1988) provides in relevant
part:
(a) In this section, "cash collateral" means cash,
negotiable instruments, documents of title, securities,
deposit accounts, or other cash equivalents whenever
acquired in which the estate and an entity other
than the estate have an interest and includes the
proceeds, products, offspring, rents, or profits of prop-
erty subject to a security interest as provided in
section 552 (b) of this title, whether existing before
or after the commencement of a case under this title.
(b) (1) The trustee, after notice and a hearing,
may use, sell, or lease, other than in the ordinary
course of business, property of the estate.
* * * * *
(c) (2) The trustee may not use, sell, or lease
cash collateral under paragraph (1) of this subsec-
tion unless-
(A) each entity that has an interest in such
cash collateral consents; or
(B) the court, after notice and a hearing, au-
thorizes such use, sale, or lease in accordance
with the provisions of this section.
* * * * *
(e) Notwithstanding any other provision of this
section, at any time, on request of an entity that has
an interest in property used, sold, or leased, or pro-
posed to be used, sold, or leased, by the trustee, the
---------------------------------------- Page Break ----------------------------------------
3a
court, with or without a hearing, shall prohibit or
condition such use, sale, or lease as is necessary to
provide adequate protection of such interest.
* * * * *
3. 11 U.S.C. 506(a) provides:
An allowed claim of a creditor secured by a lien
on property in which the estate has an interest, or
that is subject to setoff under section 553 of this
title, is a secured claim to the extent of the value of
such creditor's interest in the estate's interest in such
property, or to the extent of the amount subject to
setoff, as the case may be, and is an unsecured claim
to the extent that the value of such creditor's interest
or the amount so subject to setoff is less than the
amount of such allowed claim. Such value shall be
determined in light of the purpose of the valuation
and of the proposed disposition or use of such prop-
erty, and in conjunction with any hearing on such
disposition or use or on a plan affecting such cred-
itor's interest.
4. 11 U.S.C. 542(b) provides:
Except as provided in subsection (c) or (d) of
this section, an entity that owes a debt that is prop-
erty of the estate and that is matured, payable on
demand, or payable on order, shall pay such debt to,
or on the order of, the trustee, except to the extent
that such debt may be offset under section 553 of
this title against a claim against the debtor.
5. 11 U.S.C. 553(a) provides in relevant part:
Except as otherwise provided in this section and
in sections 362 and 363 of this title, this title does
---------------------------------------- Page Break ----------------------------------------
4a
not affect any right of a creditor to offset a mutual
debt owing by such creditor to the debtor that arose
before the commencement of the case under this
title against a claim of such creditor against the
debtor that arose before the commencement of the
case * * *.